Utilising the ‘Transition to Retirement’ strategy

Posted on: August 22, 2014
Posted by: Daniel Budreika

Transition to RetirementMany people feel uncomfortable about approaching retirement.  For some the word it’s an unwanted reminder that they are getting older, even if they don’t feel it yet.  For those who are 55 and born before 1 July 1960, one big bonus of approaching this phase in life is being able to access a ‘Transition to Retirement’ strategy.  This is certainly nothing new but it constantly surprises me as to how few people are aware of this basic ace up their sleeve.

In short, a transition to retirement strategy enables people approaching retirement to access their super while they are still working.  This can be used to reduce working hours by supplementing income or saving tax and boosting super.  The latter involves making deductible contributions into super (such as salary sacrifice) and simultaneously drawing a tax-friendly income stream from an account based pension in order to maintain or achieve a desired level of net income.  The results are astounding over a number of years, especially once the person reaches age 60, as the pension income drawn becomes tax free.  The best way to demonstrate this is through a case study.

John has just turned 55 and has a taxable income of $90,000 per year ($66,053 after tax).  He has $150,000 in super, which has been accumulated over his working life from employer contributions only.  He is happy to work full-time for another 10 years until he turns 65.  For the purposes of the exercise, we will assume that John’s super fund will earn a return of 5% per year.  By implementing a transition to retirement strategy that matches his net income, John is able to save an average of $5,900 of tax per year, whilst growing his super balance by an additional $51,000.  If John decides to keep working beyond age 65, he can continue utilising this flexible strategy until he turns 75.  The same strategy could be implemented for John’s wife who is also 55 and happens to work part-time.  This is a deliberate example using only conservative numbers.  Larger incomes and super balances produce better results again.  If John and his wife had a mortgage, the strategy could be structured to pay an income above what is needed to make additional repayments – effectively using tax effective income to pay down non-deductible debt.

A study conducted by ASIC suggested that as little as 20% of Australians seek financial advice.  If this is true, it’s actually no wonder that this strategy largely goes unnoticed.  If you are approaching age 55, now is the time to ensure you are getting ready to take advantage. If you’re not sure, there is no harm in asking.

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